By BenefitsPro

Investors don’t understand the glide paths of their target-date funds. That problem was highlighted during the financial crisis of 2008 when many people lost up to 40 percent of their retirement accounts because they were invested in target-date funds.

Many of those who suffered losses were invested in 2010 target-date funds, so their investment in risky equities should have been lower than their investment in bonds, but that was not the case.

The losses cast a light on the two very different glide paths that TDFs use to get investors to and through retirement.

“To” glide paths will see investments get more conservative as the investor nears their retirement year. “Through” glide paths also get more conservative with time, but their managers try to balance the portfolio based on the assumption people will live to be age 90 and will still need to earn money on their investments until they reach that age.

“Given the increasing size of target date fund assets and their prevalence as investment options in 401(k) and other retirement plans, the Committee’s views on ways to improve the information investors receive about these funds are greatly appreciated,” said SEC Chair Mary Jo White, in a letter to the Investment Advisory Committee.

In April, the committee agreed that most individual investors are ill-equipped to identify the risk disparities among similar-seeming funds. It also found that many professional pension fund consultants underestimate the degree of risk in many target-date funds.

The committee urged the SEC to develop an alternative glide path illustration based on the target risk level over the life of the fund.

A glide path illustration based on an appropriate, standardized measure of fund risk would be more accurate and more flexible than a glide path illustration based on asset allocation alone, the committee found.

The committee also recommended that the SEC require TDF prospectuses to disclose and clearly explain the policies and assumptions used to design and manage the target date offerings to attain the target risk level over the life of the fund. They also need to detail any fees associated with the funds.